"Making PV [photovoltaic solar] a REIT eligible asset class will give investors access to what is currently the best value in solar, the annuity of electric power sales agreements. Currently investors can mainly invest in panel manufacturers (and to some degree BOS [balance of system] providers such as converter manufacturers), which is not these days the most profitable way to play solar. Buying a piece or pieces of solar PV projects on the other hand is profitable right now but is currently the province of private equity investors. Utility scale solar on a project basis is very attractive because, unlike a coal or other fossil-fuels based plants, once the solar plant is running it produces electricity which can then be sold essentially indefinitely without risk of the price of its fuel increasing (or indeed ever costing anything at all), with very low risk of plant failure (and if it does fail, it's likely only offline for a short time, no risk of explosion), and relatively low overhead in terms of maintenance.

Legal Considerations

"The IRS could declare that solar assets were REIT-safe with a stroke of the pen."

Joshua Sturtevant has done extensive research on the legal requirements to allow REITs to focus on solar investments.

The other potential advantage of REITs as an solar investment structure is that it would not require an act of Congress for PV to become a REIT-qualified investment class. Joshua L. Sturtevant, an Associate with solar aggregator, financier, and developer Distributed Sun of Washington, DC, has done extensive research on the changes which would allow REITs which would generate all or most of their income from solar generation.

He found that "the IRS could declare that solar assets were REIT-safe with a stroke of the pen. Because of the broad authority it has been granted to regulate REITs, it could bring solar assets into the fold simply by issuing a ruling to that effect. ... [I]t wouldn’t require legislation or huge changes to the tax code." Getting a favorable IRS ruling might not be easy, but it would almost certainly be easier than getting legislation through Congress.

Sturtevant says that an IRS ruling might take the form of a "private letter ruling" or through a "revenue ruling." The IRS grants a private letter ruling in response to a taxpayer asking for clarification on an aspect of the tax code applies to them. A private letter ruling does not have broad applicability, in that it is only binding on the requesting taxpayer and the IRS. However, private letter rulings "often end up having some trickle-down influence on business decisions as they are generally accessible to tax lawyers and accountants."

A revenue ruling is "often issued at the prompting of a government official. To the extent that an issue might be a close call, it is better for the request for clarification to come from within the government as there is a better chance of obtaining a favorable (from the perspective of the requestor) outcome."

The fact that NREL issued this report suggests that someone in the government is working to prepare the way for a favorable revenue ruling. David Feldman, an NREL analyst and co-author of the report, said "We're not trying to make the decision — the Internal Revenue Service will do that. We're giving them the technical information they need to make the decisions." But somebody asked them to write the report.

Sturtevant says, "My pulse of the situation suggests that there are parties who are moving to place a request to the IRS by election time. If such a request were successful, it could be less than two quarters before a company claiming REIT status is developing solar."

Jabusch has also heard rumors predicting everything "from year end this year to Q2 2013."

Will the IRS Rule in Favor of Solar REITs?

If there has already been a request to the IRS for a revenue ruling on PV as real property, the the odds are good that the ruling will be favorable for those of us who would like to see Solar REITs. According to Sturtevant, enough political will would be sufficient to guarantee a favorable ruling. The political will is likely to depend on the outcome of the election on November 6th.

The First Solar REITs

Even if there is a favorable ruling, it may take a while for the first REITs dedicated to solar to emerge. The first movers are most likely to be traditional REITs that are already thinking about renewable energy investments.

A few REITs have dabbled with solar already as a revenue enhancement. IRS rules allow them to generate up to 25% of their income from sources other than real property, and this allows some scope for solar on REIT-owned buildings, for instance. Some solar developers are even specifically targeting the traditional REIT market. However, few REITs are likely to use this option to obtain more than a few percent of their income from solar because " the IRS tends to be very wary of anything that doesn’t smell right in the context of REITs" and " leads to wariness and conservatism by many REIT managers," according to Sturtevant. REIT managers generally feel that a little extra revenue is not worth risking greater IRS scrutiny.